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Is The U.S. The Next Low-Cost Region: Redux?

By Tim Minahan, SVP of Global Network Strategy and Chief Marketing Officer at Ariba, an SAP company

In recent weeks, news of major brand-name manufacturers – from Apple to GE – bringing production back onshore has dominated the headlines.

The reports are not surprising as deflation, low interest rates, and foreign investment at home and rising wages and transportation costs abroad have combined to make the US more attractive than China, Korea, India and other low-cost regions where global manufacturers once rushed to move production.

Many mistakenly refer to this trend as the “insourcing boom.” Technically, insourcing is the process of moving manufacturing or other processes that were done by outside suppliers – regardless of where those suppliers are located – back in house. But let’s not let technicalities distract from the real issue at hand. A shift in global macro-economic balance is causing more and more manufacturers to bring manufacturing back home to the US and Western Europe.
And here’s what’s driving it:

Rising wages in formerly low-cost regions – especially China: In the 1990s, manufacturers flocked to outsource manufacturing and shore up supply land assembly work in low-cost regions like China, India, and, more recently, Vietnam. At the time, the rallying cry of big corporates was to get the “China price,” referring to the fact that they could hire 20 or 30 workers in China for what it cost to hire one union-backed laborer stateside. No more. As many manufacturers have learned the hard way, the China price may no longer be worth it. China labor rates climbed 5X from 2000 and are expected to grow 18% annually for the foreseeable future.

Higher energy prices, transportation, and manufacturing costs: Oil prices are 3X what they were a decade ago. Couple that with constraints on cargo ships from the Far East, and that once-affordable slow-boat from China is no longer such a bargain.

Increase labor productivity in the US (and Western Europe): The percentage of the total cost of finished goods attributed to labor in the US and other developed nations continues to shrink, making it far more affordable to manufacture closer to home. The productivity boom in the US has been driven by in party plant enhancements and a shift to higher-level manufacturing. The recession and union concessions have also played a role in boosting productivity.

For manufacturers, the message is pretty clear: There’s a price to pay for cheap labor.

Case in point, GE recently reinvigorated production at its once robust Appliance Park facility in Louisville, Kentucky by bringing manufacturing for some high-end home appliance lines back from China. In doing so, the company was able to lower its production costs and ultimately its sticker price by nearly 20%. Time-to-market lead times shrunk from over 5 weeks to 30 minutes from factory to warehouse. And quality levels have also improved.

Many of the components in Apple’s hot-selling iPhone line – from components to glass screens – are now made in the US. And the company has publicly committed to producing one of its Mac lines domestically next year.

This is not just a big company trend. Savvy businesses of all sizes are leveraging business networks to not just keep tabs on existing supply in low cost regions, but also to balance the total cost factors and, in many cases, find alternative sources of supply much closer to home.

For example, Plaid Enterprises, a mid-sized manufacturer of do-it-yourself products, had outsourced most of its production to China. But when labor wage increases, rising transportation costs, and shipment delays began to negatively impact its business, Plaid used a business network to uncover potential suppliers. The network not only provided a directory of suppliers that met Plaid’s requirements, but it also offered up insights into each supplier – such as how many other buyers the supplier was doing business with on the network; how many RFPs it had been invited to and won within the past year; and how other buyers rated the performance of each supplier – harvested from structured transactions and unstructured comments and ratings from other network members. Plaid uncovered alternative suppliers as far away as Vietnam, but, after a competitive bidding process, selected a new supplier closer to home – in fact, 30 miles from its US facilities. As a result, Plaid was able to cut the cost of supply by 30% cost and shrink lead times to 30 days or less, down from over 120 days when sourcing from China.

As the tectonic plates of the global economy continue to shift, manufacturers of all sizes will continue to re-examine their once lofty low-cost country sourcing plans. Rather than making decisions solely on labor price, manufacturers and other businesses will consider total cost, time-to-market, quality and other market factors. And this holistic approach should prove more sustainable – and profitable – in the long run.

Tim Minahan is responsible for strategy development and execution for the Ariba Network, the world’s largest and most global business network. He also oversees the design and execution of messaging and marketing operations at Ariba, an SAP company.

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